Productivity introduction

This introduction defines productivity and explores why it is important for farm profitability and competitiveness.

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Productivity defined

Productivity measures the efficiency with which farmers use inputs (such as land, labour, capital, materials and services) to produce outputs (such as crops, livestock and wool).

Productivity growth measures changes in productivity over time. In the long term, productivity growth reflects changes in the efficiency with which farmers use inputs to produce outputs. It is largely driven by technological progress.

Ongoing productivity growth has enabled Australian farmers to maintain profits by producing more output from each unit of input that they use.

Productivity movements over time reflect changes in input and output quantities. Productivity will increase if:

The three Ps – production, profit and productivity

Production is the process creating outputs from inputs. Australian farmers produce a wide variety of agricultural commodities. ABARES estimates the gross value of Australian agricultural production was $63.8 billion in 2016-17 (ABARES 2017).

Productivity is the ratio of the quantity of output produced to the quantity of inputs used. Productivity growth over time reflects improvements in the efficiency with which inputs are used to produce output, and is largely independent of trends in prices.

Profit is the difference between total revenue and total cost. Variation in profit over time reflects changes in the quantities and prices of outputs produced and inputs used.

Productivity matters for farm profit

Most farmers are focussed on profit rather than productivity, but the two are closely linked in the long run. Profit is determined by the quantities of inputs used and outputs produced, and by prices paid and received. Farmers generally can’t control the input or output prices they face. To consistently grow profits over time farmers must produce a greater quantity of output from each unit of input they use – i.e. to increase productivity.

Over the past 40 years Australian farmers have faced a general decline over time in output prices relative to input prices—also known as the farmers’ terms of trade. Producing more output with each unit of input has reduced the effect of this cost-price squeeze on farm profits.

Agricultural total factor productivity and farmer terms of trade, Australia, 1948–49 to 2013–14

Source: ABARES; Sheng and Jackson 2015

Productivity growth contributes to higher profits in two main ways:

Boost revenue

Productivity gains can increase the quantity and quality of farm output that can be produced from the inputs available. The past 50 years of productivity growth means Australian farmers currently produce approximately three times more output than they otherwise could (Gray, Leith & Davidson 2014).

Reduce production costs

Continuously adopting new technologies and management practices allows farmers to reduce their input use and cost of production over time. Australian broadacre farmers have reduced total input use (including land, labour and capital) by approximately one per cent a year over the past four decades (Xia et al 2017).

Other benefits

In addition to enhancing profitability, agricultural productivity growth offers several other benefits.